IPI Finds Frivolous Class Action Suits Threaten Innovation

March 8, 2004New York, NY

A new report issued by the Information Policy Institute finds that the U.S. tort liability system negatively impacts innovation.

Dr. Turner, President and Senior Scholar of the Information Policy Institute, explained the consequences of these high costs, “Innovation, which depends on R&D expenditures, is a key engine of economic growth. The high levels of tort liability faced by firms, particularly in high-tech sectors, serve to depress R&D spending. We’re actually making it harder for firms to produce better products.”

“The U.S. tort liability system is the most expensive in the developed world,” said Robin Varghese, Institute Senior Fellow. “It already represents well over two percent of GDP, and left unchecked, that figure is only poised to grow.”

Examples cited by the study include impacts on the computer, semiconductor, and general aviation industries. Turner explained, “Liability claims decimated the American general aviation industry. Left unchanged, there is no reason why this can’t happen to other high-tech industries. Toshiba was nearly bankrupted by a dubious class-action lawsuit, and only escaped by agreeing to a billion dollar settlement that gave individuals, at most, a few hundred dollars, while their lawyers received a cool $147 million for their efforts. ”

Dr. Turner placed the issue in context, “In certain sectors–for example, IT–firms have to make huge expenditures on R&D just to keep their market share. The tort liability system, however, has created a world in which R&D expenditures are a de facto liability. Confronted with massive potential tort burdens, many U.S. high-tech firms are compelled to cut costs in other areas, including labor.”

The full text of the paper, “Class Action Tort Costs and the Consequences for Innovation,” is available for download. Institute staff will be discussing their findings with key policy makers over the coming weeks.